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Since multinational corporations have operations in different countries, the financial transactions will also be denominated in multiple currencies. Hence, financial management of short-term assets and liabilities in an MNC is much more important and complex in nature. It involves management of current assets and current liabilities denominated in different currencies.
management of current assets and current liabilities of any multinational company who has large number of branches and subsidiaries in different countries. In simple words, we manage the inventory, cash, our short term investments, our creditors and currency exchange risks.
1. Inventory Management Inventory management means to reduce the carrying and holding cost of inventory. At international level, company has to take following decisions.
Cash management
Company can use centralized cash management system and decentralized cash management system. Every transaction relating to receipt and payment is recorded. In centralized cash management system, all cash is collected in head office. Only authorized order, cash is issued from head office. Through cash pooling company can use CCM better way. In this system, companys cash is deposited in their local financial institutions and banks from different
In multinational currency management, currency risk will effect. If home currency will weak and other countrys currency will strong, it will affect your total calculation of working capital. For example, you have to pay your one employee 1000 $ in Indian currency, it is your current liability. Today exchange rate is Rs. 50/ 1 $. For this, you have to pay Rs. 50,000. Suppose, you have deposited RS. 50,000 in Indian bank for paying your Indian employees, but due to Indian currency fluctuation, exchange rate becomes Rs. 55/ 1$. It means, you have to pay more Rs
Every branchs current liabilities may be different from other branch. There should be proper rules for paying within the time limit. Optimize and improvement in payment process will increase your working capacity. In India, multinational company uses line of credit for paying its small expenses. With this, interest is charged only when the money is withdrawal for paying expenses.
Goal: Minimize cash balances without reducing operations or increasing risk. Steps:
Cash Planning - anticipating cash flows over future days, weeks, or months. Cash Collection getting cash into the firm as soon as possible. Cash Mobilization moving cash within the firm to the location where needed. Cash Disbursements planning procedures for distributing cash. Covering Cash Shortages managing anticipated cash shortages by borrowing locally. Investing Surplus Cash managing anticipated cash surpluses by investing locally or controlling them centrally.
Four techniques for simplifying and lowering the cost of settling cash flows between related and unrelated firms
Multilateral Netting
Netting involves offsetting receivables against payables so that only the net amounts are transferred among affiliates. Types
Payments netting is useful primarily when a large number of separate foreign exchange transactions occur between subsidiaries.
Financing working capital requirements of a MNCs foreign affiliates poses a complex decision problem. Financing options for a subsidiary include:
Intercompany loans from the parent or a sister affiliate. Local currency financing.
Interest Rate
Bank Loans
Commercial Paper